We all know that building home equity is good, but why? How is home equity helpful? Before we get into why you want to build equity in your home, we need to learn what home equity is.
What is Home Equity
In short, home equity is the amount of money that you owe on your home, subtracted from what the home’s current market value is. In other terms, home equity can be considered the amount of your property that is truly yours. Building home equity is contingent upon making monthly mortgage payments, and increases in market value.
How Home Equity Works
For many, building home equity is a lot like investing in a bond. The money is pretty much locked up until a certain point in time. Refinance programs such as reverse mortgages will allow you to access a portion of this equity.
Home equity isn’t guaranteed though. If the market crashes, so will the value of your house. This could result in significantly diminished home equity, or even a complete loss of it.
Calculating Your Home Equity
To calculate your home equity, you’ll first need to know what the current market value of your home is. Websites like Redfin and Zillow can provide estimates of your home’s current value, but purchasing an appraisal will give you the most accurate value.
After determining your home’s value, simply subtract what you owe on your mortgage. The resulting number will be your current home equity. If the difference is a negative number, that means the home is worth less than the amount that you owe, and you have negative home equity.
Why Should You Consider Your Home Equity?
The equity you have in your home can be looked at as part of your total net worth. There are numerous ways in which your home equity can be used to your advantage:
Selling your home
If you still owe money on your mortgage by the time you are ready to sell your home, then you won’t be able to receive the full amount that the property is worth.
Borrowing against equity
There are loan programs that will allow you to cash out on portions your home equity. Some of these loans have restrictions on what the cash can or can’t be used for. Many homeowners will put this money toward repairs or reparations that could help increase the value of the house over time.
Reverse mortgages are available for homeowners age 62 or older. These programs allow homeowners to use the equity in their house to pay off their mortgage, and the loan is repaid when they leave the houself a large amount of money.